Although most investors in bond funds focus on Yield, there are actually 4 components to a bond fund’s return. Those who focus only on yield are missing the big picture, and could lose money as a result.
The most important number is the fund’s total return, which is made up of the following 4 components:
1. Bond Fund Yield The interest income earned on the bonds held in the bond fund’s portfolio. Most investors focus on yield in order to understand the income they can expect to earn from a bond fund. Unlike individual bonds however, most bond funds do not hold bonds until maturity, and buy and sell bonds on a regular basis. As a result the yield that is quoted on a bond fund may not give an accurate reflection of what you can expect in the future. Some bond yield measures try to capture the historical performance of a fund, while others try to provide a view as to what an investor might expect in the future. The three popular measure of yields are: The Distribution Yield – The equivalent to the current yield of an individual bond. It takes the dividend income distributions made by the fund in the last 30 days and divides it by the Net Asset Value (share price) of the fund, which is then annualized. The 12 Month Yield – takes all the interest payments made by the fund over the last 12 months, and divides it by the fund’s NAV + any capital gains distributions that were made during that same time period. The SEC Yield – the closest comparison to the Yield to Maturity of individual bonds, and the preferred yield measurement used here at Learn Bonds. The SEC Yield is an estimate of the annual yield of a bond fund assuming the bonds in …
